PART 1 THE NATURE OF FINANCIAL MANAGEMENT IN THE FEDERAL GOVERNMENT COPYRIGHTED MATERIAL

Transcription

1 PART 1 THE NATURE OF FINANCIAL MANAGEMENT IN THE FEDERAL GOVERNMENT COPYRIGHTED MATERIAL

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3 1 FINANCIAL MANAGEMENT LEGISLATION AND POLICY Under the United States Constitution, the responsibility for federal financial policy rests exclusively with the U.S. Congress. Over the years, the level of congressional involvement in department and agency operations has varied from macromanagement to micromanagement. By various laws, Congress has directed that certain central agencies establish specific financial management policies and that these agencies issue specific accounting and reporting principles, standards, and administrative guidelines for compliance by other federal departments and agencies of the government. These central agencies include the Office of Management and Budget, the Government Accountability Office, the Department of the Treasury, the General Services Administration, and the Office of Personnel Management. These agencies have published regulations and rules giving operating departments and agencies further guidance in implementing legislation. A considerable body of policy has been legislated relating to overall federal financial management. Furthermore, Congress also gives broad discretion to individual departments and agencies in determining managerial, accounting, and control procedures and practices needed to manage their own operations, programs, and activities. OBJECTIVES OF FEDERAL ACCOUNTING The overall objectives of appropriation budgetary fund accounting are directed toward fiscal accountability and compliance with the expressed intent of Congress. These objectives include Ensuring that federal monies are spent only for purposes, with only those constituents, in only those locations, for only the amounts, and only within the time period set forth by Congress in its authorization and appropriation laws Preventing obligations, expenditures, or disbursements of federal monies in excess of the appropriations or budget authority legislated by Congress Fixing personal responsibility with designated federal executives for any violations or instances of noncompliance with congressional limitations or restrictions Assisting with or promoting increased effectiveness and economy in the application and rate of expending federal money Implicit features of a federal entity s systems of accounting and controls are checks and balances to ensure that several criteria of a federal appropriation are considered by a federal executive prior to the obligation or expenditure of federal monies and that program performance is consistent with law. At a minimum, all appropriations and budget authorities have three specific compliance considerations:

4 4 Wiley Federal Accounting Handbook 1. Timing The commitment and, on occasion, the rate of expenditure of appropriated funds must be made only during the time period permitted by Congress in legislation. 2. Purpose Appropriated funds may be obligated and expended only for those purposes intended or expressed by Congress in an agency s authorization or appropriation legislation. 3. Amount The total amount of obligations and expenditures may not exceed the appropriation or amount of budgetary authority legislated by Congress. IMPLEMENTING ACCOUNTING IN THE FEDERAL GOVERNMENT The implementation of overall federal financial policy through more detailed regulations, rules, and other publications is dispersed among the aforementioned central agencies as well as among other executive branch entities. The three agencies having the majority of specific government-wide financial management responsibility include the GAO, the Office of Management and Budget (OMB), and the Department of the Treasury (Treasury). The General Services Administration (GSA), the Office of Personnel and Management (OPM), and the Congressional Budget Office (CBO) have also been given either government-wide or more specific roles by Congress. Several individual operating departments and agencies are given further responsibility by law for designing, implementing, and maintaining their own systems of accounting and internal and administrative controls. Office of Management and Budget Broad changes were made in federal financial management with the passage of the Budget and Accounting Act of The most significant provisions of that Act included Title II, which established for the first time a national budget system requiring the President to formally transmit the national budget proposal to Congress at the beginning of each session. This Act also created the Bureau of the Budget (BOB) within the Department of the Treasury. Title III, which established the GAO, to be headed by a Comptroller General of the United States. The GAO is a legislative branch agency, independent of the executive branch, and responsible only to Congress. In 1939, the BOB was made a part of the Executive Office of the President, where it exercised the role of budget officer for the President. Later the BOB was reorganized and subsequently renamed the OMB, by Reorganization Plan No. 2 of By that plan, all functions of the former BOB were transferred to the director of the OMB. Since the 1980s, the OMB has operated in an increasingly broader and stronger role as the federal government s office of financial management. Over the years, many laws have given the OMB extensive responsibilities for prescribing regulations and rules governing the federal government s financial management systems of budgeting, accounting, reporting, and auditing. These tasks have been broadly mandated to include planning, programming, monitoring, performance

5 Chapter 1 / Financial Management Legislation and Policy 5 evaluation, and computer technology application, among other functions. In the last decade, this broadened inclusion was best illustrated when Congress passed the Chief Financial Officers Act of 1990 (discussed in detail in Chapter 2). This legislation empowered the OMB to take a more definitive executive role in the government s financial management. The principal medium through which the OMB publishes financial management policy to departments and agencies is a system of OMB Circulars and Bulletins. These consist of rules, regulations, and directives that detail how operating departments and agencies are to implement laws of Congress. OMB Circulars are issued when the nature of the subject is to be of continuing effect and is to remain in force until rescinded or superseded. Circulars are identified by the letter A and a number (e.g., OMB Circular A-11, Preparation, Submission, and Execution of the Budget). OMB Circular A-1 outlines the scope of the subsequent Circulars that apply to all departments, independent commissions, boards, bureaus, offices, agencies, government-owned or government-controlled corporations, and other establishments of the government, including regulatory commissions and boards. OMB Bulletins are issued when either the nature of the subject requires a single or ad hoc action by federal departments and agencies or the issue is of a transitory nature. The Bulletins are issued in annual series, numbered in chronological order. The last two numerals of the fiscal year of issuance are used to indicate the annual series (e.g., OMB Bulletins and would be the first and second Bulletins issued during the federal fiscal year 2006). Government Accountability Office The Government Accountability Office (GAO) is an independent agency in the legislative branch. It is headed by the Comptroller General, an officer appointed by the President with the advice and consent of Congress, for a 15-year term and who may not be reappointed. Congress created the GAO with the Budget and Accounting Act of Over the years, Congress has charged the GAO with many financial management, accounting, reporting, fiscal procedural, and auditing responsibilities. Congress has declared by law that the GAO shall investigate, government-wide, all matters related to the receipt, disbursement, and use of public money. These responsibilities also require that the GAO analyze expenditures of each federal executive agency, to make any investigations and audits, and to report to either House of Congress having jurisdiction over federal revenues, appropriations, or expenditures. The investigations and audits by the Comptroller General are not limited to financial examinations. Routinely, a GAO audit will assess and report on program performance related to a federal department s goals and objectives, and may consider such issues as the efficiency, economy, and effectiveness of operations. The Comptroller General is specifically authorized to audit a wide array of agencies, including federal government revenue-raising agencies, the principal ones being the Internal Revenue Service; the Bureau of Alcohol, Tobacco, and Firearms, operating units within the Department of the Treasury; and the Customs Service, now part of the Department of Homeland Security.

6 6 Wiley Federal Accounting Handbook Other legally mandated responsibilities provide that the Comptroller General may audit certain independent financial institutions and other entities, such as the Federal Reserve Board, Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the accounts and operations of the District of Columbia. Congress also provided the GAO with broad discretion over the nature, frequency, and timing of its reviews. For example, the Comptroller General typically has been authorized, by various laws, to initiate audits, investigations, or evaluations when ordered by either house of Congress, when requested by any committee of either the House or Senate, when requested by the staff of such committee or joint committee, or upon the Comptroller General s own initiative. Today, with the OMB and Treasury, the GAO shares broad, government-wide financial management responsibilities. For the GAO s part, these responsibilities are met through the active involvement of its staff in multidepartmental committees, functional task forces, government symposia, and activities of professional organizations. Department of the Treasury The Department of the Treasury is headed by the Secretary of the Treasury (not the Treasurer of the United States, who is a subordinate executive within Treasury) and is the official fiscal agency of the federal government with some of its responsibilities fixed by the Constitution itself. Created in 1789, the Treasury has been given extensive fiscal and accounting responsibilities by Congress and is the primary organization responsible for accounting and reporting on the cash receipts and cash disbursements of the government and on borrowings and the debt of the United States. On occasion, the Treasury has issued joint regulations with GAO on fiscal, accounting, and certain broader financial management-related matters having government-wide significance. Like the OMB, the Treasury has its own systems for issuing regulations and rules to departments and agencies. The more permanent or continuing guidance is set forth in the Treasury Financial Manual, but the department also issues less permanent guidance in the form of bulletins, announcements, and supplements. For the most part, federal departments and agencies look to these central agencies for coordinated policy and at times even for procedural guidance. Individual Federal Departments and Agencies Typically (at least since 1921), Congress has placed overall joint or separate responsibility and authority for financial management policy with the GAO, the OMB, or the Treasury. However, in a somewhat complicated practice, Congress has also typically made the heads of each federal department and establishment responsible for establishing the operating policies and implementing practices to comply with financial management legislation. This approach by Congress spawned a diversity of federal financial management systems, as the many federal entities needed a variety of systems of internal controls, accounting, reporting, and financial information to comply with the laws affecting their operations.

7 Chapter 1 / Financial Management Legislation and Policy 7 For example, under the Budget and Accounting Procedures Act of 1950, the GAO, after consultation with the OMB and the Treasury, was directed to prescribe the principles, standards, and related requirements for accounting to be observed by the several federal entities. In the same Act, however, Congress stated that the heads of each executive department and agency were to design and maintain their own systems of accounting and internal controls to provide full disclosure of the financial results of their entities. The result of this divided responsibility and authority was that, from the 1950s until the passage of the Chief Financial Officers Act of 1990 (CFO Act), nearly half of the federal establishments never complied with or adopted the financial management promulgations of the GAO. As described in more detail in Chapter 2, the CFO Act called for the appointment of both a chief financial officer and a deputy in each federal entity, and realigned the responsibilities and authorities for financial management in the federal government. Today, the OMB has the lead financial management role, setting policy and, in many instances, the detailed financial procedures. Its direction is often quite specific, prescribing what these financial officers shall do, how the prescribed practices are to be followed, and when reporting will be made on the actions taken by federal entities. SELECTED FINANCIAL LEGISLATION Several laws have been directed toward the way federal departments and agencies receive, account for, spend, and report on the status of federal appropriations and other budgetary authority. Some laws have been concerned with financial management, the basis of accounting used, and the reportings made by departments. Still other laws over the years have directed federal departments to better plan, manage, and monitor their operations in a more economical, efficient, and effective manner. Exhibit 1.1 gives examples of key financial management legislation of direct concern to all federal departments and agencies. Selected provisions of these laws are discussed in the sections that follow. Exhibit 1.1: Selected Laws on Federal Financial Management Year Legislation 1789 United States Constitution the initial, most basic, legislation making reference to revenues and expenditures of the federal government 1870 Anti-Deficiency Act prohibited executive departments and agencies from making expenditures in excess of amounts appropriated by Congress 1921 Budget and Accounting Act more significant provisions of this Act affect federal financial management policy, systems, controls, and practices to this day 1945 Government Corporation Control Act passed to provide for closer Congressional scrutiny of government corporations and require that these organizations undergo independent audits by the Comptroller General

8 8 Wiley Federal Accounting Handbook Year Legislation 1950 Budget and Accounting Procedures Act provided Congress with overriding accounting and reporting and more control over federal receipts, expenditures, funds, and property 1955 Supplemental Appropriation Act established statutory criteria that defined what constitutes a valid obligation against a federal appropriation 1956 Public Law permitted the President to submit annual budget information on a cost basis and to include information on program accomplishments 1974 Congressional Budget and Impoundment Act 1982 Federal Managers Financial Integrity Act changed the federal budgeting and financial process to assert more Congressional control over the executive branch reflected increased concern by Congress over the adequacy of internal accounting and administrative controls in federal executive agencies 1990 Federal Credit Reform Act required that the President s budget reflect full cost of direct loan and loan guarantee programs, including new direct loan obligations or loan guarantee commitments 1990 Chief Financial Officers Act changed significantly the accounting and reporting of the federal government 1993 Government Performance and Results Act 1994 Government Management Reform Act 1996 Federal Financial Management Improvement Act required the OMB to submit to Congress a strategic plan of major functions and operations, outcome-related goals and objectives, and a description of skills, technology and resources required required each federal department and agency to submit by March 1 of each year an audited financial statement for the preceding fiscal year showing the financial position and the results of operations required each executive agency to implement and maintain systems that comply substantially with federal financial management system requirements, applicable federal accounting standards, and the Standard General Ledger at the transaction level 2002 Accountability of Tax Dollars Act required all but the smallest of agencies to be audited annually Constitutional Authority for Appropriations The initial, most basic legislation making reference to revenues and expenditures of the federal government appears in the United States Constitution. Portions of Article 1, Sections 8 and 9, outline the financial responsibility vested in Congress: Section 8, clause 1. The Congress shall have the power to lay and collect taxes, duties, imposts, and excises, to pay the debt and provide for the common defense and general welfare of the United States Section 8, clause 2. To borrow money on the credit of the United States

9 Chapter 1 / Financial Management Legislation and Policy 9 Section 9, clause 7. No money shall be drawn from the Treasury, but in consequence of appropriations made by law; and a regular statement and account of receipts and expenditures of all public money shall be published from time to time. This is the underlying authority in other words, the power of the purse by which Congress provides for the levy and collection of federal taxes and authorizes the expenditure of public funds and other forms of financial assistance. In practice, this constitutional authority has been consistently interpreted to mean that no federal expenditure can be legally made without an earlier legal action by Congress (i.e., enactment of an appropriation or passage of budgetary authority). Anti-Deficiency Act of 1870 From the beginning, Congress has battled the executive branch and, at times, even challenged the laws of previous congresses over fiscal excesses, waste, mismanagement, and failures to adhere to spending laws. The purpose of the Anti- Deficiency Act, dating back to 1870, was to prevent executive departments and agencies from spending more than was appropriated by Congress. In later amendments, the Anti-Deficiency Act was expanded to include restrictions requiring prior formal apportionment by the OMB of all funds appropriated by Congress. Later statutes prohibited incurring expenditures and obligations in excess of appropriated funds and mandated specific sanctions related to federal executives, managers, and employees. Within federal fiscal management, probably the most quoted and most closely monitored of all financial legislation are the provisions of the Anti-Deficiency Act, more commonly cited by government accountants and auditors as Section 3679 (of the Revised Statutes) provisions. Some salient provisions of Section 3679 related to apportionments, administrative controls, and prohibitions of federal funds include The director of the BOB is required to apportion or reapportion appropriated funds, in writing, by months, calendar quarters, operating seasons, or other time periods; or by activities functions, projects, or objects; or by a combination thereof. No apportionment is permitted that would necessitate a deficiency or supplemental estimate unless such an action is required because of (1) laws enacted after transmission to Congress of the estimates for an appropriation, which require expenditures beyond administrative control; or (2) emergencies involving the safety of human life, the protection of property, or the immediate welfare of individuals in cases in which an appropriation has been made requiring sums to be paid to such individuals. An officer of the government with administrative control of an appropriation is required to prescribe, by regulation, a system of administrative controls designed to (1) restrict obligations or expenditures against each appropriation to the amount of the apportionment, and (2) enable such officer or agency head

10 10 Wiley Federal Accounting Handbook to fix responsibility for the creation of any obligations or the making of an expenditure in excess of an apportionment or reapportionment. 1 To conform to the Anti-Deficiency Act and its subsequent revisions and amendments, each federal department and agency is directed by law and federal regulations to have a system of accounts and controls that permits the subdivision of the apportioned appropriations among operating units, with the objective of monitoring the spending of funds at the highest practical level within the agency. The Anti-Deficiency Act, as amended, has generally resulted in a detailed system of signatory authorization and approval by designated department and agency officials, as well as adherence to detailed fiscal review and fund certification procedures. Budget and Accounting Act of 1921 Broad changes were made to federal financial management practices with the passage of the Budget and Accounting Act of The more significant provisions of this Act affecting federal financial management to this day include Title II of the Act, which established a national budget system requiring the President to formally transmit the national budget to Congress at the beginning of each congressional session. This Act also created the BOB within the Treasury. By later legislation, the BOB was moved to the Executive Office of the President and in 1970 was renamed the OMB. Title III of the Act, which established the GAO, headed by the Comptroller General of the United States, as an independent agency in the legislative branch, responsible only to the Congress. The Budget and Accounting Act of 1921 gave the Comptroller General the power to prescribe the forms and procedures for the administrative control and accounting of the funds appropriated by Congress to various federal entities. The GAO was also given responsibility for making administrative examinations of fiscal officers accounts and all claims against the government, and for investigating at the seat of government or elsewhere, all matters relating to the receipt, disbursement, and application of public funds. Later amendments gave the GAO the responsibility for settling and adjusting all claims and demands by or against the government. 2 Government Corporation Control Act of 1945 Early in the 1900s, there was a growing concern among the public and members of Congress about the number of federally chartered corporations and the need for closer scrutiny and independent audit of these entities. Historically, government corporations, by law, had not needed to rely on annual congressional appropriations or the passage of budgetary authority to sustain their operations. In 1927, pursuant to a Supreme Court decision, government corporations found themselves, in certain re- 1 2 In 1992 this language was revised, but without significant substantive change, in Title 31 of the U.S. Code. The Chief Financial Officers Act of 1990 transferred selected responsibilities and roles of the GAO, in the areas of accounting and financial reporting and auditing, to the OMB.

11 Chapter 1 / Financial Management Legislation and Policy 11 spects, free from accountability to the Treasury and from the audit jurisdiction of the GAO. The Supreme Court also held that the corporations were generally free of congressional control over their expenditures for administration and operations. Following congressional investigations in the 1940s, however, legislation was passed that provided for closer congressional scrutiny of many government corporations. The legislation also required these organizations to undergo independent audits by the Comptroller General. The resulting legislation was referred to as the Government Corporation Control Act of These audits were to be made in accordance with procedures applicable to commercial corporate audits and under any regulations that might be prescribed by the Comptroller General. By the 1980s, congressionally chartered but privately owned and operated financial corporations were operating as intermediaries to facilitate the flow of investment funds to specific segments of the private sector. Examples include the Federal National Mortgage Association, the Farm Credit Banks, and the Federal Home Loan Banks. Like their predecessors, the financial activities of these federally chartered corporations are not included in the federal budget (i.e., their financial transactions are considered to be off-budget), and they are a part of neither governmentwide reporting nor the reporting of federal departments or agencies that have oversight over these corporations. A major activity of these corporations is guaranteeing loans and credit a contingency risk to the federal government that the GAO has reported totals several trillions of dollars. While reference is repeatedly made in the media to these contingent guarantee liabilities, there is no statutory authority that defines the exact nature of federal financial support that might be enacted to support a chartered corporation that is experiencing severe financial difficulties. It is expected that the federal oversight entity would disclose the financial relationship of the federal government to a particular chartered corporation and the possibility of a contingent liability, but the specified liability of Congress remains purposefully vague. Budget and Accounting Procedures Act of 1950 The Budget and Accounting Procedures Act of 1950 established additional improvements in the areas of federal budgeting and accounting. It authorized the preparation of performance-based budgets, requiring that the financial information of departments and agencies be displayed in terms of functions and activities. Department and agency heads, in consultation with (what was then) the BOB, were directed by this Act to achieve Consistency in accounting and budget classifications Synchronization between accounting and budget classifications and organizational structure Support of budget justifications by information on performance (e.g., workload data) and program costs (e.g., unit cost data) by organizational units Congress now requires that the President submit certain specific, performanceoriented data, to justify budget requests sent to Congress. Budget submissions are to include information on

12 12 Wiley Federal Accounting Handbook Functions and activities of government and other desirable classification data Reconciliations of executive branch expenditures with congressionally approved appropriations Estimated expenditures and proposed appropriations for the ensuing year Estimated receipts of the government during the ensuing year Actual and estimated appropriations, expenditures, and receipts during the last completed fiscal year and the fiscal year in progress All essential facts regarding the bonded and other indebtedness of the government Balanced statements of financial conditions of the Treasury at the end of the last complete year, estimates for the end of the year in progress, and the estimated condition of the ensuing fiscal year if the financial proposals contained in the budget were to be adopted by Congress Several overriding accounting and reporting objectives were sought by Congress, including full disclosure of results of government financial operations; adequate financial information for operating and budgetary purposes; and more effective control over receipts, expenditures, funds, property, and other government assets. Additionally, executives of federal departments and agencies were directed by Congress, under this Act, to fully consider the needs and responsibilities of the executive and legislative branches in establishing systems of accounting, control, and reporting. The Act addressed, from a policy view, most of the federal government s financial management deficiencies and areas that needed strengthening. Implementation by federal departments and agencies, however, was spotty. The GAO s issuances were virtually ignored or implemented only in part by much of the government, and the OMB and the Treasury often disagreed with the GAO regarding the specific procedural changes required. In addition, Congress, when apprised of shortcomings and legal noncompliance, in some instances ignored the GAO s reports or opted not to enforce compliance, and often did not provide money or personnel to improve existing systems or implement new ones. These and other issues formed the foundation for passage of the Chief Financial Officers Act of 1990, which required many of the same changes explicit or implicit that appeared in the 1950 Act. Supplemental Appropriation Act of 1955 The Supplemental Appropriation Act of 1955 once again was the result of frustrating congressional efforts to obtain accurate financial data from executives of federal departments and agencies about the obligation and expenditure of funds against congressional appropriations. This Act established statutory criteria that defined what type of transaction constitutes a legally binding obligation against a federal appropriation. If a claim fails to conform to the criteria in this Act, that claim is not a valid obligation of the United States Government and cannot be paid. According to Section 1311(a) of this Act, no amount shall be recorded as an obligation of the government unless it is supported by one of the eight prescribed forms of documentary evidence. Congress intended that these eight forms of documentary evidence (defined in more detail in Chapter 4) encompass the full range of

13 Chapter 1 / Financial Management Legislation and Policy 13 types of obligations that may be legally incurred in the course of governmental activities. By this Act, Congress also required that every entity report, at year-end, its unliquidated obligations and its remaining unobligated appropriation balances. This report is certified by officials designated by the federal department or agency head as having overall responsibility for recording and monitoring obligations. This reporting also initiates a special federal-level year-end audit procedure, known government-wide as a 1311 or the year-end unliquidated obligation audit. Public Law , 1956 In 1956, Public Law amended the Budget and Accounting Act of 1921 and the Budgeting and Accounting Procedures Act of 1950, permitting the President to submit annual budget information on a cost basis (as opposed to an obligation, cash, or hybrid basis) and to include information on program accomplishments. Once again, as in the 1950 Act, Congress directed federal department and agency heads, among other tasks, to take the necessary action to achieve: (1) consistency in accounting and budget classifications; (2) synchronization among accounting, budgeting, and organizational structure; and (3) support of budget justification by information on performance and program costs. Cost-based budgets. The congressional objective for cost-based budgets was to permit executive branch management and Congress to review the total resources on hand, on order, and being procured, rather than limiting the budget review only to money sought from Congress in the form of new obligational authority and appropriations. A cost-based budget was defined as one identifying the cost of a program in terms of goods and services consumed or used. The budget data would have to disclose the balances of goods and services on hand that were obtained through expenditures of prior year appropriations and the extent of any unconsumed goods and services that would be available to support the current or future year s budgeted program. Thus, a cost-based budget would show the net or new or additional obligational authority necessary to support the current year activities. Particularly revealing is the legal requirement to identify carryover inventory, funds, and other resources from one year to another. Accrual accounting. Department and agency heads were also directed to maintain accounts on an accrual basis; to show the financial resources, liabilities, and costs of operations in a manner that facilitated the preparation of the required cost-based budgets; and to include adequate monetary property accounting records (in contrast to only physical counts of property) as an integral part of the accounting system. Under this legislation, accrued expenditures were defined as charges incurred for goods and services received and other assets acquired, regardless of whether payment has been made or whether invoices have been received. Again, as in earlier legislation, Congress addressed several issues and provided a legal basis for making much-needed, and in some instances innovative, improvements in federal financial management. Unfortunately, throughout the years, departments and agencies were permitted to ignore or implement only selected sections

14 14 Wiley Federal Accounting Handbook of the law. On many occasions, Congress even ignored or refused to provide the resources to implement its own laws. The ideas embedded in this legislation were again included in the CFO Act and later laws of the 1990s. Congressional Budget and Impoundment Act of 1974 The Congressional Budget and Impoundment Act of 1974 made considerable changes in the federal financial process and was a concerted attempt by Congress to assert more control over the financial activities of the executive branch. This Act accomplished a number of things: It established a new budget process in an attempt by Congress to incorporate more discipline over its own activities in the congressional authorization and appropriation processes. It had been several years since Congress had met its own laws, and even the Constitution, with respect to approving appropriations prior to a new fiscal year and prior to any expenditures being made with such appropriations. (In the 1990s, Congress was still having difficulty meeting its own imposed deadlines.) It established Committees on the Budget in each house of Congress to force the many committees of Congress to coordinate and agree, in advance, on revenue and expenditure levels. Previously, Congress had not imposed fiscal and operational controls over itself, and at times the several committees were not fully aware of the financial commitments and needs of others. These Committees on the Budget were ineffective for 20 years. It took the budget and deficit crises of the 1980s and 1990s to make it necessary that these Committees exercise their authority and be given meaningful roles in the money deliberations of Congress. It established the CBO to provide Congress with counterweight in challenging and critiquing data provided to Congress by the OMB and the executive branch and to give Congress a source of independent financial professionals. Ever since, the CBO has provided that service to Congress and has generally been viewed as being an independent, honest broker with respect to calculations, forecasts, and other estimates related to financing federal programs. It established procedures that provided or underscored congressional control over the impoundment of funds by the executive branch. Over the years, presidents had taken the liberty of impounding, or not spending, appropriated funds if they disagreed philosophically or otherwise with the purpose for which Congress had made monies available. It mandated a new fiscal year of the federal government, changing it from July 1 of each year to October 1. For several of the years preceding the impoundment law, Congress had been hopelessly delinquent in its responsibility to provide the appropriation finances demanded by the Constitution by the first day of a new fiscal year. Year after year, many appropriations were not available to departments and agencies by June 30. By changing the fiscal year-end, Congress bought itself an extra three months. In later years, however, Congress failed with regularity to complete its work by October 1; annually much of the federal government still operates on a temporary financing basis, re-

15 Chapter 1 / Financial Management Legislation and Policy 15 ferred to as a continuing resolution, for weeks and sometimes months into a new fiscal year. For a few years after the Congressional Budget and Impoundment Act, Congress had difficulty restructuring its legislative process, realigning committee jurisdictions, and generally adhering to the rules that it had imposed on itself. By the 1990s, the general effect of the Act had become more positive and Congress did conform, with the exception of the timely appropriation of funds. Even today, Congress has difficulty limiting hearings, reconciling differences, ceasing debates, and passing the appropriation laws needed to run the government by October 1. In some years, difficulty is encountered in passing even the face-saving continuing resolutions. This was particularly true in 1996; the federal government was twice shut down for lack of funds, and the same difficulties characterized the process at the end of fiscal year 1999 and the start of fiscal year Federal Managers Financial Integrity Act of 1982 The Federal Managers Financial Integrity Act of 1982 amended sections of the Accounting and Auditing Act of 1950, reflecting increasing concern by Congress over the inadequacy of internal accounting and administrative controls in federal executive agencies. By this Act, Congress directed agencies to establish accounting and administrative controls in accordance with the standards prescribed by the Comptroller General. The law required heads of departments and agencies to provide assurance to Congress that Obligations and costs are in compliance with applicable law Funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation Revenues and expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and of reliable financial and statistical reports, and to maintain accountability over the assets The OMB, under this Act, would have to establish guidelines for evaluating agencies systems of internal accounting and administrative controls. Federal executive departments and agencies would have to prepare an annual statement to Congress and the President on the status of compliance with the prescribed standards, reporting on whether the agency was in compliance with the Act and on any material weaknesses in the control systems. This critical piece of legislation has grown in importance with the passage of time. Guidance to assist federal agencies in their implementation is contained in OMB Circular A-123, Management's Responsibility for Internal Control. Partly as a result of the enactment of the Sarbanes-Oxley Act, the guidance and the requirements of the Federal Managers Financial Integrity Act were significantly expanded in December 2004, effective beginning with fiscal year 2006, to more closely parallel internal control reporting requirements imposed on most corporations subject to Securities and Exchange Commission filing and reporting requirements.

16 16 Wiley Federal Accounting Handbook Federal Credit Reform Act of 1990 The Federal Credit Reform Act of 1990 was part ( Title V Credit Reform ) of the Omnibus Budget Reconciliation Act of The Act applied to federal loans and loan guarantees; the stated purposes of this Act were to 1. Ensure a timely and accurate measure and presentation in the President s budget of the costs of direct loan and loan guarantee programs 2. Place the cost of credit programs on a budgetary basis equivalent to other federal spending 3. Encourage the delivery of benefits in the form most appropriate to the needs of beneficiaries 4. Improve the allocation of resources among credit programs and between credit and other spending programs The Federal Credit Reform Act required that, beginning in 1992, the President s budget request must reflect the cost of direct loan and loan guarantee programs, including the planned level of new direct loan obligations or loan guarantee commitments associated with each appropriation request. The specificity of the new language in relation to appropriations for loans and loan guarantees was unique for a federal law. Major provisions of the Act that were effective for fiscal year 1992 were For each fiscal year in which the direct loans or the loan guarantees are to be obligated, committed, or disbursed, the President s budget reflect the longterm costs to the government of the subsidies associated with the direct loans and loan guarantees. Before direct loans are obligated or loan guarantees are committed, annual appropriations generally are enacted to cover these costs. Borrowing authority be provided to the Treasury to cover the nonsubsidy portion of direct federal loans. This Act changed considerably the financing, accounting, and reporting for federal loans and loan guarantees for major segments of the population not adequately served by nonfederal financial institutions. These programs are among some of the more popular supported by Congress, including farmers home loans, small business loans, veterans mortgage loans, and student loans. This legislation closed a 200-year history of accounting for less than the full costs of direct loans and loan guarantees by Congress and many presidents. It required federal departments and agencies that managed programs of direct loans and loan guarantees to now recognize up front, at the time of legislative action, the true costs that such programs were likely to incur, and that the full congressional appropriations or budget authority be provided at that time. Under this law, the projected default costs and interest subsidy costs to be incurred must be recognized at the time of the loan and at the current market rate. Historically, Congress and departments and agencies regarded a federal loan as only a disbursement and had preferred to make no formal accounting for the future repayment of this loan. This lack of accounting eliminated the embarrassing need to

17 Chapter 1 / Financial Management Legislation and Policy 17 make default entries later to formally account for the uncollected loans. Even worse, in the case of loan guarantees, no formal accounting entry was made until the loan defaulted or the federal government was required to make payment under a loan guarantee program. In many instances, these events happened years later, were not anticipated, and in the case of the failures of savings and loan associations and banks, resulted in billions of dollars of losses that a later generation of taxpayers had to finance. This Act addressed another cost of federal loan programs that historically had not been reflected by operating departments or agencies with the acquiescence of Congress, of course. All federal loan programs provide for a rate of interest below the going market rate, in essence a break or subsidy to the borrower or the recipient of the guarantee. But to finance these loan programs, the Treasury issues notes, bonds, or other securities and pays market interest rates (e.g., 7%). These borrowed monies are then loaned to borrowers at the much lower interest rates set forth in the laws (e.g., 4%). This interest subsidy (e.g., in this case 3%) the difference between the lower loan interest rate and the higher market interest rate was another real cost incurred by the federal government, but one for which an accounting had never been made. Now the Federal Credit Reform Act requires the government to account, up front, for the full cost of federal loan and loan guarantee programs, which includes the estimated cost of anticipated default, plus the difference in interest rates between what the Treasury pays to borrow money and what Congress charges to borrowers of these federal monies. Chief Financial Officers Act of 1990 The Chief Financial Officers Act of 1990 (described in greater detail in Chapter 2) passed within minutes of the adjournment of the 101st Congress, significantly changing the accounting and reporting of the federal government. The responsibility for setting accounting and financial reporting standards for the executive branch shifted from the Government Accountability Office, a legislative branch agency reporting to Congress, to the OMB, an agency in the executive branch. The OMB was given additional financial management, accounting, and reporting responsibilities. Further, this Act required the designation of the first chief financial officer of the United States and, ultimately, the formal establishment of a chief financial officer in each major executive entity of the federal government. The Act also contained requirements for improving agency systems of accounting and financial management; increasing internal controls to ensure the issuance of reliable financial information; and publishing entity financial statements. For the first time, Congress required that federal executive departments and agencies have annual independent audits of agency-wide financial statements, and that these audit reports be made available not only to Congress, the President, and others in government, but also to the public.

18 18 Wiley Federal Accounting Handbook Government Performance and Results Act of 1993 The focus of the Government Performance and Results Act of 1993 was the fact that federal managers were seriously disadvantaged in their efforts to improve program efficiency and effectiveness because of insufficient articulation of program goals and inadequate information on program performance. Further, congressional policy making, spending decisions, and program oversight were seriously handicapped by insufficient attention to program performance and results. As a result, Congress required in this Act that the OMB submit to Congress a strategic plan for federal department and agency program activities. The plan must contain these elements: Mission statement of major functions and operations of each agency Outcome-related goals and objectives Description of how the goals and objectives were to be achieved, citing the operational processes, skills, technology, capital, information, human and other resources, and other needs required to meet the stated goals and objectives The plans were to cover a five-year period and be updated at least every three years. Additionally, the affected agencies were to prepare an annual performance plan covering each program activity. Under this Act, such program performance reporting was to begin no later than March 31, The initiative was phased in through a pilot plan that commenced as early as fiscal year To achieve some consistency and comparability in the communication of the mandated information, Congress, in the 1993 Act, provided these definitions that were to be used in all information relating to the Act: Outcome measure An assessment of the results of a program activity compared to its intended purpose Output measure The tabulation, calculation, or recording of an activity or effort expressed in a quantitative or qualitative manner Performance goal A target level of performance expressed as a tangible, measurable objective, against which factual achievement shall be compared, including a goal expressed as a quantitative standard, value, or rate Performance indicator A particular value or characteristic used to measure output or outcome Program activity A specific activity related to the mission of an agency Program evaluation An assessment, through objective measurement and systematic analysis, of the manner in and extent to which an agency program achieves intended objectives Until this Act, the connotations of these terms were not consistent across the federal government. With these definitions, overseers of departments and agencies had some confidence that the discussion, costing, and reporting of accomplishment and productivity measures are uniform.

19 Chapter 1 / Financial Management Legislation and Policy 19 Government Management Reform Act of 1994 The Government Management Reform Act of 1994 contained certain housekeeping and administrative provisions. Title I provided limitations on certain annual federal pay adjustments; Title H, leave accumulation restrictions relating to the federal government s senior executive service; and Title III, streamlining of management control by eliminating or consolidating duplicate or obsolete reporting requirements made in the past to Congress or its committees. Beyond such housekeeping provisions of the Act, however, Title IV required the head of each federal entity to prepare and submit to the OMB, by March 1 of each year, an audited financial statement for the preceding fiscal year showing the financial position of the offices, bureaus, and activities, and the results of operations of these organizations. Additionally, beginning no later than March 31, 1998, the Secretary of the Treasury was to prepare and submit to the President and Congress an annual audited financial statement for the preceding year, covering all accounts and associated activities of the executive branch of the United States government and reflecting the overall financial position and results of operations of the executive branch. The Treasury was to prepare these financial statements according to the OMB s form and content requirements. The audit of these financial statements was to be made by the Comptroller General of the United States (the head of the GAO). Thus, for the first time in the country s history, a government-wide financial statement was to be prepared and audited. Federal Financial Management Improvement Act of 1996 The Federal Financial Management Improvement Act is another Act having as its intent the improvement of financial management in the federal government. It is particularly concerned with the areas of fiscal and accounting practices, such as full costing, reflecting the total liabilities (present and contingent) of congressional actions, and accurately reporting the financial conditions of the government. The authors of the Act believed that current federal accounting practices undermined the ability of the Government to provide credible and reliable financial data, that the practices encouraged waste, and that they did not assist in achieving a balanced budget. Though brief, this Act accomplished several needed changes, such as Formally recognizing the work of the Federal Accounting Standards Advisory Board (FASAB), which had been organized to recommend federal accounting and reporting standards, not pursuant to any law, but only under an interagency agreement among Treasury, the OMB, and the GAO. This Act made official the FASAB s standards, concepts, and reporting requirements. Requiring federal departments and agencies to incorporate the FASAB s accounting and reporting concepts and standards into federal financial management systems; to evaluate cost and performance information using these standards; and to increase the capability of federal entities to monitor execution of